Cost of health care seen rising steeply

Although tax collections are on the rebound, the state’s rainy day fund is the third-highest in the nation, and the state has added 48,000 jobs this year, the Patrick administration’s top finance official warned municipal leaders Tuesday to expect a “challenging” 2012 budget cycle with nearly 40 percent of the appropriations expected to be needed for health care programs.

“We have a big hole to dig ourselves out of and it’s going to take years, not months,” said Jay Gonzalez, secretary of administration and finance, at a State House meeting with city and town officials. “We’re looking at more challenges next year with 40 percent of our state budget funding health care through subsidized health programs and employee health insurance.”

Gonzalez described the Patrick administration as “actively” preparing its budget proposal for fiscal 2013. The governor is due to file that plan on Jan. 25, giving lawmakers a chance to issues proposals of their own and seeking to have a plan in place for the July 1, 2012 start of the next fiscal year.

Gonzalez told the News Service after the meeting that the administration is anticipating having to solve a “mismatch” between tax revenue and spending needs in next year’s budget, which officials commonly refer to as a “budget gap.”

“I’m anticipating – in terms of our budget development, from a starting point perspective as we look at the typical pressures in those areas and what we think tax revenue growth might be – our starting point is we’re solving problems, not figuring out where to spend more money,” he said.

He said that the state’s rainy day fund – which hit a high of $2.3 billion and was depleted to about $600 million during the economic downturn that began in 2008 – was not large enough at the outset to preserve critical state services during the recession.

“One of the things we’ve been trying to do and what we mean by having a structurally balanced budget and policies in place to ensure structural balance going forward, is that it’s okay when tax revenues are still coming in below a sustainable trend – and we’re still coming out of tough times – to be using a little bit of one-time money to fill that cyclical gap,” he said. “Theoretically, we shouldn’t have to adjust state services at all. We should be able to sustain where we are through good and bad. That means having the discipline during the good to put money away, to put extra money away. We’ve put a construct in place to manage this with a long-term forecast.”

Gonzalez also described an automatic income tax cut – to 5.25 percent from 5.3 percent on Jan. 1, 2012 – as “more likely than not.” The final determination, he said, would be made in December, and he added that administration officials have already adjusted projected tax collections to include the effect of a cut.

“We won’t know for sure until toward the end of the year,” he added.

During the meeting with local officials, Gonzalez said that in meetings with state budget stakeholders, he often gets requests to restore budgetary spending for programs that have been cut during the economic downturn of the last few years. But he said that continuing pressure on the state to fund caseload-driven programs – such as Medicaid and homelessness services – will consume some of the growth in revenue.

“We’re expecting to see continued growth in tax revenues,” he said. “But there is going to be a mismatch we’re going to have to manage again. We’re looking at another challenging budget year.”

Gonzalez also noted that spending cuts under consideration in Washington could result in direct cuts to programs funded by the state and indirect cuts to grants in research, health care and the defense industry, which have large presences in Massachusetts.

Gonzalez said that since July, when the governor signed a law empowering city and town leaders to force more aggressive reductions in health care benefits for workers and curbed certain collective bargaining powers for municipal employees, four communities have “gone through the entire process” and saved a combined $18 million for government and employees.

Kimberly Driscoll, mayor of Salem, urged Gonzalez and Lt. Gov. Tim Murray, who presided over the meeting, to preserve local aid for cities and towns in next year’s budget and perhaps “inch us up … in a proportional way.”

Gonzalez said the state would need to examine the investment assumptions of the state pension fund, a $45 billion fund used to support payouts to state and some municipal retirees. Built into the pension funding formula is an assumption that the pension fund will grow at a long-term rate of 8.25 percent.

“We need to take a hard look in the years ahead as to whether we need to take a fresh look at our investment assumptions and whether they’re too aggressive,” he said. He also provided an overview of pension reform expected to land of Gov. Patrick’s desk Tuesday, noting that its implementation would save about $3 billion for the state pension system and $2 billion for municipal pension systems.

“The primary thrust of the bill is to put our pension system on a fiscally sustainable course going forward,” he said.

During a discussion of expanded gambling legislation, Josh Ostroff, a selectman in the town of Natick, urged the administration to ensure adequate representation of local communities in any decisions about the siting of casinos and mitigation decisions for cities and towns.